Overseas Outsourcing: Beneficial or Detrimental?

by: Stephen Harries

Traditionally, as a business executive, your job is to make the biggest profit possible, so why not save money by sending your operations to another country, where operational costs are significantly lower?  Foreign countries have a lot to offer businesses, including cheaper labor, cheaper locations, lower operational costs and other economic incentives like tax breaks.  Thus, from a strictly business perspective it would appear, your duty as an executive, is to opt for outsourcing. Yet, in the long term, one must consider whether outsourcing to foreign countries is beneficial or detrimental to the US, and its economy?

Taking a deeper look, you may see that outsourcing jobs to foreign countries has many negative effects as well.  After all, what are the effects of job outsourcing on the United States and its people?  Job outsourcing could be detrimental to not only the U.S. economy, but to the citizens of  the U.S., as well.  As companies pull their operations out of the U.S., many Americans are left unemployed.  This causes a snowball effect, increasing welfare need, homelessness and crime.  In addition, job outsourcing has a huge impact on the United States’ economy, causing increased taxes, a higher cost of living and a possible recession.   Although outsourcing jobs to foreign countries will greatly benefit businesses by offering cheaper labor, lower operational costs, tax breaks and cheaper locations, the result of outsourcing jobs will be detrimental to the United States economy and the American people, by creating unemployment and a steady economic decline.

In countries such as India and the Philippines, there are few labor laws, and worker exploitation is high.  This makes an attractive proposition for U.S. companies to move, both financially and operationally. Manufacturing jobs have been slipping away form U.S. shores for years. But recently, experts say, the movement of white-collar jobs overseas has accelerated as cash-strapped companies have determined that there is little downside to moving a job that pays $50,000 in the United States to country where a qualified applicant will work for $20,000. (Bates 2003, p12-14)

In the U.S., organizations like OSHA (Occupational Safety and Health Administration) and the EPA (Environmental Protection Agency) help protect workers, but in low cost foreign countries, such organizations do not exist (Wikipedia,2006).  Therefore, workers in foreign countries are forced to work longer hours, at a shockingly low wage.  In addition, there is a lack of health benefits, retirement benefits and pension costs, so if workers are injured they are not protected by insurance or workman’s compensation.  Recently there has been high pressure mounted on companies who promote sweatshops, which has helped to change working conditions by increasing the wage and decreasing the working hours.

Day-to-day, operational costs become lower when a company moves its operations to a low-cost foreign country.  Products 
are cheaper to manufacture, due the low cost of materials, which saves businesses a lot of money.  Cheaper materials make 
products cheaper to manufacture, yet companies can sell the product at the same price, resulting in a larger profit margin.  For example, because of the availability of cheaper materials in China, it is cheaper to manufacture toy cars in China and export 
them back to the U.S.A., than it is to produce the same toy cars in the U.S., using the higher cost materials, and then distribute
it to the U.S.  Also, the cost of real estate is substantially lower in foreign countries. Therefore, a company has much cheaper 
building and utility costs.

The governments of both the United States, and the low-cost foreign country, offer excellent tax incentives to U.S. companies that want to move their operations overseas.  In an effort to give U.S. companies an edge against foreign competition, the U.S. government helps support foreign governments by using attractive tax incentives to entice U.S. companies to move their operations to foreign countries.  In the cheaper foreign country, the local government will make sure that the outsourcing company receives highly attractive tax breaks that will effect the U.S. companies’ decision to move their operations abroad.

The benefits for a U.S. company moving abroad will steadily help the increase of both economic environments, improving both foreign affairs and trade deficits with a strong import and export market.  The pitch of discussion rose further on February 9 2004, when President George W. Bush’s chief economic adviser, N. Gregory Mankiw, released the annual Economic report of the President and praised off-shoring of U.S. service jobs as a “good thing. Outsourcing is just a new way of doing international trade,” he told reporters, adding that the practice is only “the latest manifestation of the gains that economists have talked about” for centuries (Council of Foreign Trade 2004).

With all the positives of job outsourcing, what is the effect on the U.S. economy?  For a start, experts estimate that jobs will be lost to overseas companies at a rate of 12,000 – 15,000 jobs per month (Council of Foreign Trade, 2004).  This is great for the foreign country, but not what U.S. employees want to hear.  The employees that will be hit hardest will be those who are employed in manufacturing, IT support, general customer service and financial services.

A recent survey released by Chicago-based outplacement firm Challenger, Gray & Christmas indicated that most Americans believe that U.S. employers should be doing more to keep those jobs in the country. And, that the federal government should be doing more to train chronically unemployed Americans to fill jobs not being sent overseas. (Bates, 2003, p12-14) 

The employees in foreign countries are now just as skilled as U.S. employees, and their cost for employment is a fraction of the cost to that of a U.S. employee. The resulting high unemployment rates, may lead to a sharp increase in welfare claims and welfare fraud, costing the U.S. taxpayer millions annually, which in turn will lead to higher patients claiming state programs such as Medicade.  The U.S. government may be forced to increase taxes in order to cover this expense.  Again, this will cost millions of dollars a year for American taxpayers, resulting in a significant increase in the cost of living.  Not only will state and federal income taxes will rise, but social security will take a massive hit, as well. Future pension claim amounts will then be driven down in order to accommodate a rapidly decreasing economy.  Eventually, if the cost of every day living rises, then more and more U.S. citizens and residents will become homeless, as they cannot afford to take care of themselves, forcing them out into the street.  As the amount of people living on the streets increases, the chances of living in a low crime society diminish, as more people will turn to crime in order to survive.

Losing key industries to cheaper foreign countries and increased unemployment levels could have a devastating affect on the U.S. economy.  Studying the Great Depression of the 1930’s will demonstrate to present governments how a sudden rise in unemployment can destabilize economies.  A recession could occur from a higher cost of living, with the cost of goods increasing and the ability to purchase these goods decreasing; this may create inflation in the market place.  Recessions are common in capitalist or free market economies, occurring at least once a decade, but if the U.S. government continues to support the growth in outsourcing of key jobs to cheaper foreign countries, then an economic depression that was the magnitude to that of the 1930’s may be on the horizon.

The security risks of both homeland security and consumer privacy are threatened when a company moves its operations to a foreign country.  Most foreign countries do not possess the necessary data-protection legislations, such as safe harbor, in place to protect private information.  Recently, the Federal Deposit Insurance Corporation (FDIC) reported that there are political and socioeconomic risks of the country itself, insufficient controls within internal operations and transactional controls that in due course, affect consumer privacy, insufficient privacy regulations, there are few laws to protect trade secrets and the potential credit risks, are five major risk areas (Quittner, 2004).

 “Other issues include an increased threat of terrorism, computer viruses, and customer identity theft.  Some experts fear that foreign companies may have substandard internal controls” (Quittner, 2004).  Americans, in general, are not comfortable with providing personal information to someone who is based in the U.S.  Then why would Americans feel comfortable providing the same information to someone based in a foreign country?  The potential fraud risks are unimaginable and who is responsible?

With larger companies outsourcing their operations to foreign countries, to take advantage of lower costs and to improve production, where does this leave smaller businesses competing in the same market, who cannot afford to outsource? Capitalization is a worrying system for smaller businesses.  The business owners of both large and small companies know that if the larger company has the market trust, then the smaller company cannot survive.  Even with the governments controlling monopolies, capitalism is a force that is strong in thriving economic countries.

Globalization is heavily promoted as helping weaker economic climates to become stable, bringing high investments and technology that is aimed at improving and increasing production levels and living standards in the lower economic country.  This all sounds ideal, but what has globalization really done for these economies?  The World Trade Organization (WTO) was set up to govern globalization, but instead, gave more power to large companies (Maria, 2006).

While job outsourcing offers businesses cheaper labor, lower operational costs, tax incentives and cheaper locations, it has many negative effects on the United States’ economy and its people.  There are many advantages to overseas outsourcing.  U.S. based businesses that move their operations will benefit from the lower costs that foreign countries have to offer, which include, cheaper labor, low operational costs, excellent tax incentives, cheaper locations and utilities.  However, this will be detrimental to the U.S. economy with possible high unemployment levels and an economic decline.  Overseas outsourcing does have benefits for strong worldwide economies, benefiting the poorer foreign countries and helping them to establish an industry, which they would never have achieved on their own.  Yet, what damage will this do to the employed population of the U.S. and the smaller business who stabilize the economy? 

As with everything in the business world, trends come and go.  The “dotcom” boom exploded and after a few years died a slow death, and the same may occur with the overseas outsourcing boom.  The cheaper countries may eventually increase their production, labor and utility costs, and as soon as this happens, U.S. companies may have start looking for the next opportunity to take advantage of, and hopefully this will be back on U.S. soil.

 

References

 

Bates, S. (2003).  Overseas Outsourcing: How Big a Threat? HR Magazine,

48(9), 12-14.  Retrieved March 16, 2006, from EBSCOhost database.

Council of Foreign Trade. (2004).  Trade: Outsourcing Jobs.  Retrieved

March 8, 2006, from Web site

http://www.cfr.org/publication/7749/

  Maria, L. (2005).  On a collision Path with Globalization.  Retrieved April 15, 2006, from

            Web site http://theworldandeverythinginit.blogspot.com/2005/04/on-collision-path

            with-globalization.html

  Quittner, J. (2004).  Offshoring Can Cut Costs, But it Raises Risk.  American

Banker, 169(128), 8-9.  Retrieved March 16, 2006, from EBSCOhost  

database.                    

  Wikipedia. (2006).  Offshoring.  Retrieved March 14, 2006, from Web site

             http://en.wikipedia.org/wiki/Offshoring